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Summary

  • Lake Shore Gold posts earnings of $13.1 million on revenues of $75.1 million thanks to rising gold production and lower costs.
  • These figures exceeded my expectations put forth in May, especially on the production cost front ($790/oz. actual vs. my conservative estimate of $1,000/oz.).
  • Despite this growth and increased efficiency, the company still needs to find more resources to offer compelling value, although its location makes it an interesting speculative stock.

Lake Shore Gold (NYSEMKT:LSG) blew away the numbers last Thursday when it reported its second quarter earnings. The company reported earnings of $13.1 million on $75.1 million of revenue, which looks extremely compelling considering its market capitalization is just $455 million. What was most impressive was the company's increase in production to 53,000 ounces of gold for the quarter vs. 27,600 ounces in the second quarter, 2013. Furthermore, the company reported a 38% improvement in all-in sustaining costs, which came in below $800/oz.

The company's guidance is admittedly weaker than this, with projections of 160,000 - 180,000 ounces of production for the full year with all in sustaining costs of around $1,000/oz. These are the figures I used in calculating the company's value back in May, when I suggested that the stock had run too far. This was a follow-up analysis to one I wrote up in August, 2013 when the stock traded at $0.31/share (it was 129% higher when I said to take profits and it is now more than triple the price at $1.09/share).

With the company's strong second quarter performance, I am now of the belief that Lake Shore Gold will be able to outperform its guidance. However, I am hesitant to become bullish, especially given the stock's run-up. The reason is that the company's resource base is relatively small, and it would require a sizable increase in order for the current valuation to be justified even if we adjust the company's cash-flow potential to reflect the company's Q2 performance. The problem is that the company's defined resource base only allows for a little more than 5 years of production, and even if the company trades at around 9-times earnings 5 years of production just doesn't cut it, especially when we consider the company's debt load. However, investors seem to be confident in the company's potential to increase its resources, and given that its land is located in the Timmins Gold Camp, I am not unsympathetic.

With this in mind I see the speculative appeal, but I would like the company much more if it made a bid for one of its neighbors such as Gowest Gold (OTC:GWSAF) or Lexam VG (OTCQX:LEXVF). In my opinion if you are interested in betting on the Timmins region these are much more interesting prospects.

Source: Update: Lake Shore Gold Posts Phenomenal Earnings